Drivers of Firm Investment in Low and High-Carbon Energy: Capital Markets and Climate Policy

38 Pages Posted: 22 Apr 2023

See all articles by Christian Wilson

Christian Wilson

University of Oxford - Smith School of Enterprise and the Environment

Gireesh Shrimali

University of Oxford

Ben Caldecott

University of Oxford - Smith School of Enterprise and the Environment

Date Written: April 14, 2023

Abstract

The cost of capital is a key driver of the low-carbon transition, as changes in firm-level financing costs can support or hinder low-carbon energy investment (LCI) and high-carbon energy investment (HCI). Using asset-level data from the S&P World Electric Power Plant database, we track firm-level LCI and HCI for publicly listed electric utilities firms from 2012-2021. Using a fixed-effects Poisson model, we find that a reduction in the firm-level cost of debt directly increases firm-level LCI and HCI, and indirectly increases investment by enabling debt capital raising. We then control for climate policy using the OECD Environmental Policy Stringency Index. We find that market-based policies, such as carbon prices and taxes, directly increase domestic LCI and act as a moderator, strengthening the relationship between debt capital raising and LCI, while doing the opposite for HCI. However, we find inconclusive results regarding the effect of feed-in tariffs. In summary, these findings demonstrate the importance of capital markets in driving firm-level transitions and show that governments can channel private capital away from HCI and into LCI through policy interventions.

Keywords: energy transition, cost of capital, climate policy, capital flows, low-carbon energy, fossil fuels

Suggested Citation

Wilson, Christian and Shrimali, Gireesh and Caldecott, Ben, Drivers of Firm Investment in Low and High-Carbon Energy: Capital Markets and Climate Policy (April 14, 2023). Available at SSRN: https://ssrn.com/abstract=4418542 or http://dx.doi.org/10.2139/ssrn.4418542

Christian Wilson (Contact Author)

University of Oxford - Smith School of Enterprise and the Environment ( email )

United Kingdom

Gireesh Shrimali

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

Ben Caldecott

University of Oxford - Smith School of Enterprise and the Environment ( email )

United Kingdom

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